Token burning, private sales, or even waiting lists are all marketing strategies for creating artificial scarcity. Artificial scarcity is the purposeful imitation of an item’s supply, even when the technology, production and sharing capacity exists to create a much greater abundance of the item.
The core motive behind artificial scarcity is to increase demand for a product or service, as people tend to find place a higher value on things that are limited or ‘exclusive’. The perception that something could ‘run out’ creates a greater interest due to FOMO (fear of missing out), or desire for buyers to purchase the item and sell it for a higher price (otherwise known as arbitrage). Cryptocurrencies are a perfect example of artificial scarcity. From the moment of inception, coins are coded to have a maximum supply that can never be exceeded (even though it is theoretically possible to alter the rules of the code to increase the supply). Bitcoin will only ever have 21 million coins mined, which means that as long as demand increases, the price will rise because supply is fixed. This artificial scarcity is what makes it possible for Bitcoin to achieve a piece of $20k per coin, and for people to take seriously those who predict we could see Bitcoin at $100k per coin.
Pre-ICO Private Sales
When certain companies know that there is high demand for their ICO, they can leverage the situation by creating early access barriers to their tokens (or an artificial scarcity of access). Investors will be willing to pay a premium to get early access because they believe the later group of investors will buy into the tokens at an even higher price, enabling them to sell at a profit. As an example, Telegram’s ICO saw early investors double their money before an offering had even begun.
Token burning occurs when a company destroys the remaining tokens not sold during an ICO in order to potentially raise the price of the token by reducing the circulating supply.
Companies like Binance use token burning to lower the amount of tokens circulating in the market, thereby creating artificial scarcity and raising the value of the coin. The company’s whitepaper explains how the coin burn works and states “every quarter, we will use 20% of our profits to buy back BNB and destroy them until we buy 50% of all the BNB (100MM) back. All buy-back transactions will be announced on the blockchain. We eventually will destroy 100MM BNB, leaving 100MM BNB remaining.” An analogy for this concept would be if the US Federal Reserve decided to reduce the amount of US dollars in circulation in accordance with the growth in GDP (so the higher the GDP, the less money would be in circulation). This means that as the country’s production increased, its currency would become more scarce, ultimately making the US dollar stronger over time. So far, Binance has bought back and burned about 5 million coins since October 2017. The following cart indicates that BNB coins have benefited from a slight price boost after each burning period:
Other industries that we’re quite familiar with also utilize scarcity to increase the value of the products/services offered:
Diamonds have always been thought of as a rare item that could only be found in a few places around the world through labor-intensive mining. However, the reality is that diamonds are far more common that the public has been led to believe, as large gem companies have created artificial scarcity by controlling the supply of diamonds that enter the market. The practice started in the 1880’s, when Cecil Rhodes, the chairman of De Beers mining company discovered that he could inflate prices on command by taking control of the rights to every diamond mine he could find. According to the Washington Post, this subsequently led to De Beers owning “90 percent of the world’s rough-diamond trade through most of the 20th century, as the company hoarded stones in basement vaults and doled them out strategically.”
Although De Beers’ share of the diamond market has decreased to 40%, this tactic is still practiced today, now with other companies like Alrosa and Argyle with holding a certain amount of the 163 million carats mined annually from the marketplace.
Amazon employs the artificial scarcity tactic on their ecommerce website. Whenever users are looking to purchase an item, they will usually a message saying “Only _ left in stock”. Whether the number of items left in stock is actually what is stated (some user have complained that it wasn’t), the message is designed to draw the attention of customers and create a sense of urgency to buy the item before the opportunity is lost.
So what other ways can blockchain companies make use of the natural human tendency to desire for limited items?
Bounty programs encourage participants to create or share content about the company in exchange for receiving tokens. The programs are typically launched before an ICO or before the token is listed on exchanges, making them more attractive as people will want to get hold of the tokens before they become available to the public.
An Airdrop is a strategy where the blockchain company simply gives their tokens away for free in order to build awareness. Airdrops can create scarcity by announcing the amount of tokens a company will offer for free, and declaring that only coin holders will receive bonus coins proportional to the amount of total coins they already hold. This incentivizes people to buy more coins in order to get a larger portion of the free coins being offered. The main objective of an airdrop is to create initial exposure that will hopefully build interest in the project and lead to opportunities down the road where the company can employ more scarcity-based strategies.
Another slightly more risky example would be to strategically limit the number of exchanges that your token is listed on. Most post-ICO companies aim to get their tokens on as many exchanges as possible. However, if your company’s token is already in high demand, it may be beneficial to space out the number of exchange listings over a period of months in order to create artificial scarcity. One could even take this tactic a step further by only offering your token on a single exchange developed and hosted on a company’s website. In addition to creating demand, this strategy allows you to scale more slowly and consider more factors from a smaller group of early adopters.
For companies still trying to build traction, limiting the number of exchanges your token is listed on may be counterintuitive. However, it may also allow you to learn a lot about who your most avid supporters are, and how to attract more of those type of users.
Artificial scarcity enables potential customers to be more receptive to the value that companies present with their product or services. Industries from ecommerce to diamonds have all used this tactic as a way to control the price of their products without the need for additional spending on marketing or R&D. However, such tactics must be used responsibly in order to build a long term relationship with customers that is based on trust and a meaningful exchange of real value.
Although Cryptocurrencies are fundamentally valued by supply and demand, important factors such as a strong value proposition, superior product and correct product/market fit must supersede the creation of artificial scarcity in order for ICO’s to maintain a supportive customer base and secure future rounds of investor funding.